Counting the cost: calculating the price of an (un)healthy ecosystem

If an individual or company incurs no cost for pollution, there is no economic …

When confronted with environmental problems, difficulties often arise in the accounting. Just how much is a particular problem costing the economy? How much is it affecting human health? It's difficult enough to assign an economic value to health and well-being, but how do you put one on a particular species of plant or animal? Natural beauty itself can also have an economic impact. Given the complexities, we often settle for calculating the economic cost of addressing an environmental issue. That's often a much easier number to calculate (although the results can be intimidating), but it doesn't capture the full value of environmental services.

A similar problem emerges when attempting to include environmental degradation into the cost of a product or service. You may pay for the materials, labor, marketing, and shipping of a product, but what about the cost of the pollution associated with it? If an individual or company incurs no cost for that pollution, there is no economic incentive to avoid it. The cost will be borne, in a distributed fashion, by the population as a whole. These costs are referred to as "externalities" because they have no effect on the market.

A policy article published this week in Science argues for improvements in how we include ecosystem services in free market interactions. The authors point to the Millennium Ecosystem Assessment’s conclusion that 60 percent of ecosystem services have declined over the past 50 years, noting, "This is not surprising: We get what we pay for." Governments around the world are beginning to implement policies to change that, but the article warns that poorly designed schemes, though well-intentioned, can actually make the problem worse.

Failure often arises, the authors write, when pricing schemes do not accurately track changes in the resource or service, or do not include all the costs associated with its degradation. It can be very difficult to design robust market-based programs that do so. As an example, they mention recent complications in the US cap-and-trade market for sulfur dioxide emissions, which was instituted in 1990 to curb the pollution that causes acid rain.

Rule changes meant to address flaws in the program were struck down in court in December 2008, and the resulting uncertainty quickly drove the price of emissions allowances to zero, which is about where they’ve stayed since. While the EPA scrambles to implement a replacement plan that can survive legal challenges, emitters have virtually no financial incentive to invest in pollution controls.

Other schemes fail to account for interconnected ecosystem services. If programs that encourage biofuel cultivation cause the clearing of tropical forests for farmland, the net result could be counterproductive. Ecosystem interactions are complex, and effective solutions can be elusive.

The authors also stress that attempts to kill two unrelated birds with one stone (for lack of a less ecologically hostile expression) are rarely successful. Here they refer specifically to agricultural programs that aim to assist the poor, stating, "Poverty reduction is a laudable goal," they write, but money spent tackling it should should signal any reductions in ecosystem services. (In other words, the money should stop flowing if it would induce environmental degradation.) Inefficient ecosystem protection ultimately impacts poor farmers, so bundled programs don’t help them in the long run.

There are ways for governments to tailor successful schemes, but they require a series of questions to be addressed. Policy makers may need to choose among a cap and trade system, simple regulation (with fines for violations), and direct payments to subsidize ecosystem preservation. The authors also suggest a number of factors that should be considered. For starters, what type of public good is being protected? Is that affected by many parties (think fisheries) or a few (think air pollution)? Is its value determined by the best sample (habitat) or the weakest (storm protection)? Finally, will the rewards be seen immediately, or is it an investment in the future?

Jurisdiction can be another hurdle, as issues may be local, national, or international. Those who protect the resource may be geographically disconnected from those who benefit from it (again, think air pollution).

Even if well-designed programs are implemented, the difficulty in assessing the economic worth of ecosystem services remains. Because of this, the authors call for expanded use of environmental metrics, and suggest they be considered alongside traditional economic measures of national wealth. (The United Nations System of Environmental and Economic Accounts represents one attempt to do just that.) Such a metric would make clear the distinction between exploiting a natural resource and managing it sustainably.